$1,000,000 net on primary residence, How do I avoid the tax?

Question

I have a family member who is moving to a new primary residence and is set to close in a few weeks. He does not need any proceeds from the current home to make the purchase. After several months of improvements to the current home, he plans to put it on the market and will net $1,000,000 profit upon the sale.  How can he avoid the $150,000 tax on his capital gain?  Is there a loophole in the “1031 exchange” rules or some other option to consider?  I would love some advice from a tax expert or real estate mastermind.

Dave Foster · Answer

@Cody Wilhite, it's not a loophole but if he can exercise some patience he can take $500K of profit tax free and 1031 the remaining profit into new real estate thus eliminating the tax totally through a mix of tax deferred 1031 treatment and sec 121 primary residence sale.

He needs to be willing to hold on to it as an investment for a year or so and then sell.  He will still qualify for the $500K of gain tax free (if he's married).  And he can then 1031 the remainder into another investment property.  His only tax bill would be the depreciation recapture on the time it was held as investment.

Dave Foster · Answer

@Cody Wilhite, Actual rental is not a statutory requirement.  But he has to treat it like an investment.  And his bar to cross to prove that if ever audited is probably a bit higher because of the conversion from primary.  Holding it for rental is one obvious demonstration of intent.

Cody Wilhite · Answer

@Thomas Rutkowski The Monetized Installment Sale looks like an option. I need to do a lot more reading before I could suggest to him. Thanks again for the idea.

Cody Wilhite · Answer

@Dave Foster Thanks, your are right the 121 should work for the first $500k. He has some concerns about the Seattle market going down over the next year and does not want to have a single rental luxury home. Is their anyway he could buy a few properties here in Texas with a 1031 exchange without needing to rent his property in Seattle?

Thomas Rutkowski · Answer

Yes. A monetized installment sale will work. He'll get cash at closing and can defer the capital gain for 30 years. I've got CA clients facing the same issues. They'd rather take the money and run rather than get back into real estate right now.

$1,000,000 net on primary residence, How do I avoid the tax?

$1,000,000 net on primary residence, How do I avoid the tax?

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